Why Same-Day Delivery's No-Win For Old Retailers

by Dee GillNovember 11, 2013

Society’s growing insistence on instant gratification has been the saving grace of bricks and mortar retailers this last decade, because even Amazon.com (AMZN) can’t hand over Bluetooth speakers or a warm sweater minutes after you decide to buy it. But with online sellers getting serious about same-day delivery programs, Target (TGT), Wal-Mart Stores (WMT) and other real stores will find themselves fighting to keep even this key advantage. For shareholders in those massive, slow-growth companies, it might be an expensive war.

eBay (EBAY) upped the ante in this battle a couple of weeks ago by announcing plans for same-day delivery in 25 cities by next year. It also announced the acquisition of a U.K. courier company, Shutl, to facilitate the expansion. EBay, along with Amazon and Google (GOOG), already offered same-day delivery on a very limited basis. The roll-out with Shutl, which already delivers in several U.S. cities, ramps up the program quickly. Amazon and Google also are expanding their same-day delivery programs.

eBay’s sole goal in this venture is to raise revenue. Although EBay will charge $5 for the service, CEO John Donahoe explains that delivery itself doesn’t need to make money for the company. He’s happy if it breaks even. Similarly, Amazon CEO Jeff Bezos is unconcerned with the cost of the service. Amazon already spends billions of dollars annually on free and subsidized shipping.

On Wall Street, that profit-blind approach to deliveries is a particular problem for traditional retailers. Amazon can lose money on deliveries because investors believe the revenues gained now will turn into profit gains later. The ability to inflict pain on competitors while engaging in seemingly self-destructive behavior earned Amazon the nickname the Suicide Bomber of Retail on YCharts. We write about Amazon frequently in large part because of its impact on competitors.

Google can also ignore the bottom line implications because delivery is an insignificant part of an otherwise massively profitable operation. eBay can settle for breaking even because like Amazon, its shares are a revenue growth bet, and like Google, it has other bigger, profitable operations. Each of these growth plays has done much better for investors in the past five years than those value shares from Target and Wal-Mart, even with the dividends the older companies offered, as seen comparing total return price.

No investor believes the Target and Wal-Mart types would spark massive revenue growth with same day deliveries. Both of these companies have delivered goods through online sites for years, and those sales are not big enough to turn their mainly real estate-based businesses into high growth companies.

Wal-Mart and Target, Best Buy (BBY) and the like need to add same-day-delivery simply to keep the sales that they have. Each of those companies has been testing the services with little to report so far. If the services at Amazon and EBay really catch on, we can expect the traditional retailers to ramp up their delivery services too.

It’s unlikely that traditional retailers can truly compete with online sellers for the same-day business without suffering some similar profit erosion. And that’s a much bigger sacrifice here on earth, where profit margins for major retailers are notoriously thin. Wal-Mart’s and Target’s gross profit margins have been narrowing since the last quarter of 2011, in large part because they are battling online retailers on other fronts.

The delivery expenses will come out of the small but steady earnings gains these old retailers use to raise dividends and buy back shares; the things that help prop up share prices even though revenue growth is slow.

For now, only a very small number of people can get same-day delivery from anyone. If those services expand, the profit damage from them will also, at all of these companies. But the Wal-Mart and Target shareholders will care a whole lot more.

Dee Gill, a senior contributing editor at YCharts, is a former foreign correspondent for AP-Dow Jones News in London, where she covered the U.K. equities market and economic indicators. She has written for The New York Times, The Wall Street Journal, The Economist and Time magazine. She can be reached at editor@ycharts.com. Read the RIABiz profile of YCharts. You can also request a demonstration of YCharts Platinum.